An investment trust is a listed company that exists to invest its shareholders’ money in other listed companies. They usually issue shares once and begin with a fixed number of shares and fund size. Investors buy shares in an investment trust, as opposed to buying units in a unit trust. This can be via a stockbroker as a lump sum or through the savings schemes set up alongside many investment trusts. Many of these savings schemes actually allow lump sums as well as regular contributions. See our guide to collective investments [LINK] for more information on regular savings versus lump sum.

As investment trusts are closed ended, the value of your investment does not only depend on the value of the shares it holds alone, but also on the demand for shares in the trust itself. This differs from how unit trusts [LINK] are priced. The value of the investment trust’s underlying shares is called the net asset value (NAV). If this is the same as the share price, the trust is said to be trading at par. If it is trading at a discount, it means the share price is lower than the NAV. An investment trust that is trading at a premium, on the other hand, has a share price that is higher than the NAV.

Investment trusts usually seek to provide either capital growth or income and are actively managed, aiming for total returns that are above the market average. They can invest in a wide spread of areas – generalist finds – or may take a more focused approach, for example those that concentrate on Japanese stocks or emerging market equities.

Like any other quoted company, investment trusts must publish full-year results, an annual report and hold an annual general meeting. That way, you can easily keep track of their performance.

Another difference between an investment trust and an open-ended fund is that the former can borrow money to invest (as any listed company can), a process known as gearing. This works as both an advantage and a disadvantage: if an investment trust performs well, gearing can enhance the returns, but it can also magnify any losses.

The main charges include the dealing costs (similar to buying or selling any other type of share), as well as the annual management fee. Investment trusts are typically seen as a more cost-efficient way to invest, providing access to a diversified, professionally managed portfolio of investments for all levels of investor – even those who only have small amounts to invest.  

For more information on investment trusts, see the performance tables printed in What Investment every month or visit the Association of Investment Company’s (AIC’s) website at www.theaic.co.uk

Find out how your investment trust is performing [LINK]